Friday, April 11, 2008

Give Up State versus Market Dogma

Shyam Ponappa / New Delhi March 4, 2007

Let's be practical and eclectic.

We are now reeling from the inevitable corrections in a developing market driven by runaway sentiment, hampered by infrastructure and supply constraints, fuelled and spooked by global sentiment — including China’s and the world’s alarming slump just before Budget 2007. A good time to take stock of the fundamental underpinnings for our encouraging prospects, such as they are.

This is the third of four articles on what India needs beyond its tipping point, assuming that is where we are (see "Beyond India’s Tipping Point", Business Standard, December 7, 2006). To recap, these articles are premised on the critical importance of economic competitiveness to increasing per capita GDP, bringing a modicum of prosperity to all, through improved productivity with radical changes in the four following areas to achieve an appropriate level of competition in the public interest:

- First, the government to change from ruler to partner and facilitator, as a stakeholder in the public interest, away from the exploitative, adversarial stance inherited from colonial and feudal legacies (in the article cited above).

- Second, the role of the Left to evolve towards a more inclusive Social Democracy, away from conflict and confrontation based on outmoded ideologies.*

- Third, the subject of this article: bridging the divide in market philosophy between the privateers and the champions of state control. Difficult, yet necessary to get away from the Hobbesian ‘nasty and brutish’ chaos of non-regulation, even though all other roads have so far led to the inadequacies we continue to face.

- The fourth will address the need to change our personal and social attitudes, the slippery slope of individual commitment and action, a variant on WYSIWYG: What You Give Is What You Get, in a recursive, endless loop.

These four areas of volition are endogenous factors; the catch: the proviso that government sees itself as a stakeholder and stops being an exploiter. All four are driven by an underlying principle of game theory: acting competitively in one’s self-interest in non-zero-sum games, assuming that counterparts will act competitively in their self-interest, results in suboptimal results. Such ‘maximin’ outcomes can always be improved upon by collaboration. The exceptions are where the situational constraints, that is, logic and structure, not psychological limitations, preclude better collaborative outcomes, because the structure of the situations are zero-sum, leading to win-lose results. For instance, if you and I negotiate, what you gain is necessarily what I lose, and vice versa. For more on this, see 'The Game Plan' at

Another premise is that only organised, collaborative, systematic, well-planned efforts can make for a sustained, broad improvement in living conditions all around. Finance Minister Chidambaram’s response after the Budget speech to his NDTV interlocutors, that he must cater to a broader constituency than only the media’s concern with big business, is unexceptionable. However, allocating funds to populist causes is like throwing good money after bad if the delivery quality is not ensured.

Escaping From Ideologies

The changes essentially call for eschewing ideologies and dogma in favour of collaborative professionalism, that is, informed, open decisions based on expertise. Some of the significant barriers are outlined below.

An enduring and powerful myth of international economics, business, and policy is that of "free markets" and "free trade". Many in India seem to subscribe to these notions, ignoring the enormous gulf between the developed markets that tout these myths and ours, which render such comparisons meaningless. Much of the reason for this may be that free trade is America’s ideology if not its reality, with all that this implies in terms of dominance in press, media, and power. It was Milton Friedman, however, who said that a free market “exists nowhere in the world. almost everywhere what you have, at best, is a partly free, largely hampered, private market.”

Then, there are the repeated invocations of Adam Smith’s Invisible Hand. Little attention is paid to his castigation of what rampant capitalism in the form of the East India Company was doing to India. A clear and incisive book by Nick Robins, The Corporation that Changed the World: How the East India Company Shaped the Modern Multinational, seems to have received scant attention in the Indian press, although it has done much better abroad. One reason may have been the timing of its release in India, which coincided with the launch of William Dalrymple’s The Last Mughal. Robins’ critique of the East India Company was simply obliterated. One wonders, though, whether it might also be that self-selection here, as in America, leads to less attention to those things that do not conform to the prevailing dominant theme, namely, privatisation and free markets.

Third, there is the oft-made argument by purists for monetary policy to contain inflation, regardless of the known supply constraints: initially oil, then wheat, vegetables and pulses. On the opposite (statist) side, there is the related irony of administered prices: if oil prices rose to $80 a barrel, there would be no fiscal deficit (see "Oil price of $80/barrel can erase fiscal deficit", Business Standard, February 20, 2007)!

Obviously, we need a systematic, structured, institutional approach to these supply problems as much as to the Administered Price Mechanism for petroleum products.

Fourth, harping on privatisation instead of autonomy, i.e., reducing government control and interference. Clearly, government control and interference are massive costs. For examples of what to avoid, see 'How to kill a PSU', Business Standard, February 27, 2007, for the cases of ONGC and BSNL. But if changes can be made to introduce autonomy, that is where to focus.

Collaborate To Win

Let us recognise at the outset that every nation uses its policies to pursue its national interest, regardless of speeches at international conferences. Let us also recognise that we can do this far better if we approach it systematically, and collaboratively. There is a price to be paid: statists and privateers have to learn to play team, something we seem to do only when other people make the rules, e.g., functioning in corporate environments abroad, or targeting foreign markets, as with the major IT companies like Infosys, Wipro, or TCS, or Sundaram Fasteners in automotive products.

The price includes giving up our penchant for claiming omniscience on whatever side we are. Team play means accepting that there are limits to one’s knowledge, and respect for the knowledge of others, even when such expertise is in areas we do not comprehend fully.

Most important, all players have to recognise that organisation and systems are necessary for long-term planning and execution, and put these in place. Otherwise, we cannot have cities that are clean and beautiful, or a clean, beautiful and prosperous countryside. No amount of individual excellence and accomplishment can substitute for the achievement of organised collective action.

* 'Opportunities for the Left', Business Standard, Feb 1, 2007:

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